Iran aiming to make oil contracts better for foreign investors

TEHRAN, Iran — Iran said Sunday it plans to introduce a new generation of oil contracts by June that promise to be more attractive to foreign investors as it seeks to significantly boost production should international sanctions hobbling its vital energy industry be lifted.

The new terms being developed signal the OPEC member’s eagerness to attract outside expertise and capital, and are a response to oil and gas companies’ frustration with earlier terms that they felt offered little upside reward.

Mahdi Hosseini, head of the contract revision committee in the Petroleum Ministry, told reporters that the new terms are being designed for a post-sanction era and aimed to better align Tehran’s needs with the interests of international investors. He said officials were seeking a “win-win” setup that would better balance companies’ risks with rewards.

Iran currently allows foreign oil companies to operate under what are known as “buybacks,” which Hosseini acknowledged have drawn complaints about cost from oil companies.

Under that system, the contractor pays to develop a given oil field in exchange for a pre-agreed rate of return over a certain period of time. The contractor transfers operation of the field to Iran once work is done and typically does not have a long-term stake in the fields.

Iran began revising the contract terms in October. Hosseini said the new model being developed aims to ensure long-term cooperation with outside investors and that the committee has consulted international companies on the new version of the contract.

Iran needs some $150 billion in investment for its energy sector over the next five years, he said.

Tehran has not provided details on the exact shape of the new contracts that could be offered, but they stop short of transferring ownership of the fields themselves, Hosseini said. The government is banned from giving such concessions under Iran’s constitution.

Further details will be presented at a conference later this month, though the proposed changes must still be approved by the Cabinet and other decision-making bodies.

Oil companies aren’t enthusiastic about buybacks because they offer no upside if prices rise or if the companies exceed their production targets, according to analysts Cliff Kupchan and Greg Priddy at the U.S.-based consulting firm Eurasia Group.

“Even if sanctions were lifted, buybacks would remain a significant deterrent to development of the energy sector,” they wrote recently.

Buybacks are also unattractive to oil majors that prefer to lock in long-term agreements where they can book the reserves in the fields they develop or at least operate them for terms stretching for a decade or more.

“The oil companies feel they add most value in the operating phase” rather than in the drilling and set-up of wells, said Robin Mills, head of consulting at Manaar Energy Consulting & Project Management in Dubai. They prefer contracts that reward them with incentives for hitting certain targets, he said.

“Under the Iranian system, you have no incentive to go even one barrel over what you’ve promised. Which means you’re trying to follow a very conservative develop plan,” he said.

Mills added that the way buybacks were typically structured also gave companies little protection against cost overruns, meaning that any unexpected snags came out of their pockets. “It’s all downside and no upside,” he said.

Hosseini said parliament has already approved the use of what are known as production sharing agreements, or PSAs, for deep-water projects and oil and gas fields shared with neighboring countries.

Under PSAs, foreign investors are allowed to use money from oil produced from the projects to recover their costs, and then share the rest of the income from the field with the government.

Western sanctions put in place in 2012 over Iran’s disputed nuclear program have choked oil exports to around 1 million barrels per day. Iran has vowed to raise production to 4 million barrels per day within six months of sanctions being lifted, up from about 2.7 million barrels now.

The country relies on oil exports for roughly 80 percent of its foreign revenue and some 50 percent of its annual budget.

The West suspects Iran’s nuclear program has a military dimension. Iran denies the charge, saying its nuclear activities have peaceful purposes like power generation and medical treatment.

Iran in November signed a deal with world powers agreed to stop some controversial nuclear activities in exchange for limited relief from sanctions targeting sectors including its oil exports. Negotiations on a final deal are to begin this month.
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